Hong Kong, June 16, 2020 -- Moody's Investors Service has confirmed the Baa3 issuer rating and
senior unsecured rating of Nexteer Automotive Group Limited.
The outlook on all ratings has been changed to negative from ratings under
review.
This rating action concludes the review for downgrade initiated on 27
March 2020.
RATINGS RATIONALE
"The ratings confirmation reflects Nexteer's track record of sustaining
its strong credit and business profile as a steering systems provider,
with its robust metrics providing a buffer against market volatility due
to the economic slowdown amid the coronavirus outbreak," says
Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"The negative outlook reflects the downside risk from the coronavirus
outbreak over the next 12 to 18 months against the backdrop of the company's
geographic and customer concentration. The outlook also incorporates
the risk that the company's sales and profitability could be weaker and
take longer to recover than we currently expect, which could reduce
its rating headroom in terms of leverage," adds Ho.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. More specifically,
Nexteer's exposure to manufacturing activity and the auto sector
has left it vulnerable to shifts in market sentiment, given its
sensitivity to consumer demand, and interruption to supply chain.
The impact is partly mitigated by Nexteer's track record of prudent
financial management, including the maintenance of credit and liquidity
buffers.
Moody's expects global auto unit sales to fall 20% in 2020 versus
a year ago and recover 11.5% in 2021. As a result,
Moody's expects Nexteer's revenue will fall about 20%
year-on-year in 2020 before recovering by about 11%
in 2021.
The electric power steering (EPS) business — which made up 67%
of Nexteer's revenue in 2019 — will continue to drive sales over
the next 12-18 months, because of gains in market share and
the increasing penetration of EPS in developing auto markets, such
as China (A1 stable) and Brazil (Ba2 stable).
At the same time, Moody's expects Nexteer's profitability —
as measured by its adjusted EBITA margin — to recover from about
2.7% in 2020 to about 5.5% in 2021 as global
auto sales recover.
Moody's expects the company's debt leverage to rise to about 1.9x
in 2020 as EBITDA falls on the back of slower global auto sales,
before gradually improving in 2021 as global auto sales recover.
Moody's expects Nexteer will continue to grow its revenue scale
over the next three to five years, which will be accompanied by
a gradual improvement in customer and geographic diversity. Nonetheless,
Moody's expects Nexteer's revenue exposure to North America,
which reached 68% in 2019, to remain high during the same
period.
Nexteer's rating continues to benefit from its 24% effective stake
ownership by Aviation Industry Corporation of China (AVIC), which
provides Nexteer with customer introductions, business partnership
introductions and the facilitation of funding access.
Nexteer's liquidity position is strong, as reflected by its cash
to short-term debt coverage of over 8x and net cash position at
the end of 2019.
Nexteer's rating reflects (1) the strong barriers to entry for its products;
(2) the company's track record and global footprint; (3) the good
growth of its EPS product; and (4) Moody's expectation that Nexteer
will maintain its sound credit metrics.
On the other hand, Nexteer's rating is constrained by its:
(1) concentration in terms of customer revenue; and (2) developing
scale and geographic concentration.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
For Nexteer's customers in the auto manufacturing industry, meeting
regional emission requirements, particularly those related to carbon
dioxide, is one of the most pressing and difficult challenges over
the medium to long term. Auto parts manufacturing is also among
the 16 sectors with very high or high exposure to carbon regulation in
Moody's heat map of environmental risks. Nexteer, as
an auto parts supplier, has exposure to auto manufacturers whose
vehicle mix is not aligned with regulatory requirements or consumer clean-air
preferences. This risk is partially offset by the company's
financial capacity to accommodate investment in R&D and product applications
in alternative fuel vehicles. As of year-end 2019,
about 17% of Nexteer's EPS, steering columns and intermediate
shafts and driveline systems backlog included solutions for electric vehicle
applications.
Product quality falls under social risk. Nexteer is exposed to
responsible production risk in terms of its requirement to produce and
deliver products on a timely basis while maintaining product quality.
The company's long track record as a steering system and driveline products
supplier helps to mitigate this risk.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action reflects the impact on Nexteer's
credit profile of the breadth and severity of the shock which has been
partially offset by its solid financial and liquidity buffer.
Nexteer's ownership is concentrated and only a minority of its board consists
of independent directors. These governance concerns are counterbalanced
by the company's status as a listed and regulated entity and track
record of maintaining sound corporate governance and prudent financial
policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook on Nexteer's rating could return to stable if the company
(1) improves its revenue, profitability and financial leverage,
and (2) maintains its prudent financial policy, with low leverage,
good liquidity, and disciplined capital expenditures and acquisitions.
Specifically, Moody's could change the outlook to stable if the
company's headroom within its rating widens on a sustained basis,
in particular with respect to the threshold of debt/EBITDA below 2.0x.
The ratings could be downgraded if (1) Nexteer's EBITA margins decline
while its debt leverage — as measured by its debt/EBITDA —
rises above 2.0x on a sustained basis; (2) its customer and
geographic diversity declines and it fails to expand its scale; or
(3) it pursues an aggressive financial policy that leads to a deterioration
of its credit metrics.
The principal methodology used in these ratings was Automotive Supplier
Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Auburn Hills, Michigan, and listed on the
Hong Kong Stock Exchange in October 2013, Nexteer Automotive Group
Limited manufactures steering and driveline systems. The company
had 28 manufacturing plants across North and South America, Europe
and Asia at the end of 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
